Tag: I.B. Economics

IB Business & IB Economics.

For the first time since 1945, as from today, November the 11th, 2017, new labour laws come into force in Brazil. The new laws have been welcomed by the business community, who feel that the laws bring Brazil’s labour market into the 21st century, but many, including the Trade Unions and the poor, have protested against the changes.

In economic language these types of changes are often referred to as ‘ making the labour market more flexible’. In economics it is an example of a ‘ market based supply side policy’ the aim of which is to increase economic growth and shift the long run aggregate supply curve of the economy to the right (see below).

Agg. Supply Curve Shifting Right.

The laws make it easier for companies to hire and fire workers, allow companies to use their workforce in more flexible ways, which will cut the cost of labour for many businesses. However, they are controversial and some feel that Brazil’s poor will be worst hit by the changes.

It is difficult to summarize all the changes to the law in such a short blog, but here are some of the highlights:-

It will be easier and less expensive to hire and fire workers.

Meal vouchers, medical insurance, bonuses and travelling expenses will no longer be classified as ‘ employee remuneration’ as they are now.

Compulsory union contributions have been abolished. They will be voluntary from now on.

Allowing companies to split their employee’s vacation time into three separate periods. Previously holidays had to be taken over one period of 30 days per year.

From now on employers will not pay their workers overtime if they stay on at their work premises because of poor weather or unsafe conditions.

Time spent travelling to work is no longer considered as ‘ working hours’. In the past it was.

Employers can now bargain directly with their workers to set pay and conditions, rather than with a Trade Union.

It will be easier to hire workers on different types of contracts – part-time , remote workers (working from home) and intermittent workers.

Companies with 200 or more employees will have to set up a Worker Representation Committee.

Outsourcing will now be allowed , even for ‘core business’ functions. Previously it was only allowed for peripheral business functions like catering and security.

‘ Equal pay for equal work’ rules will be more flexible. Previously workers working on different business sites, or even in the same city, could claim equal pay for equal work. Now it will be restricted to workers only working on the same site.

IB BUSINESS & MANAGEMENT AND IB ECONOMICS.

From ‘Brexit’, to the election of Donald Trump as US president, a number of recent world events have surprised and shocked many people.

Can we link anything on the IB Economics and IB Business & Management syllabuses to these profound changes in politics, society and economics? Can business and economics explain anything about these happenings?

Of course it can!

Let’s look first at executive pay (Section 2.4 of the Business syllabus, salaries and remuneration) . As Ha-Joon Chang points out in his masterly book “23 Things They Don’t Tell You About Capitalism“, the salaries (or more accurately the compensation packages) of senior US company executives has increased dramatically over the past few decades. In Chapter 14 of his book, “US Managers Are Overpriced”, Chang produces some astonishing statistics to back up his claim in the title of the chapter. He says that in the 1960’s the ratio of CEO compensation to average worker compensation used to be in the region of 30-40 to 1; in the 1990’s this ratio rose to about 100 to 1, and in the 2000’s to an astonishing 300-400 to 1 (P150).

How do economists explain such a huge rise in executive pay in US corporations? Demand and supply of course! (Section 1 of the syllabus, Microeconomics) The reason why executive salaries have risen so high, they say, is that the demand for such skilled and able managers far exceeds their supply . Companies have to pay these managers such high salaries because, if they don’t, they would be poached by their competitors. Moreover, these high salaries just reflect the ‘ contribution’ (read productivity) that these executives give to the companies that employ them.

Chang comprehensively debunks this argument. He points out that it is mainly neo-classical, or free market economists (Section 2 of the syllabus, Macroeconomics), who believe this. US Executives would have to be ten times more productive than equivalent personnel just a generation ago and this is extremely unlikely (P151).

Moreover, why have average US worker wages remained stagnant? Is this because their productivity has remained unchanged over the past two or three decades? Again highly unlikely, says Chang (P152).

Average hourly US wages have remained stagnant since 1972. Source: Economic Policy Institute, “Wages and Compensation Stagnating,” 2011, based on Bureau of Labor Statistics data.

Chang also points out that US executives, in comparison to their foreign counterparts, are excessively paid. In 2005, Swiss and German CEO’s were paid 64 and 55 percent of their US counterparts’ salaries; Swedish and Dutch CEO’s were paid 44 and 40 percent respectively, and the Japanese a measly 25 percent (P152).

So what has all this got to do with the election of Donald Trump? A lot. Trump ran on a ticket saying that he was going protect the American middle classes and the jobs of working class Americans. He fed off the justifiable anger that many middle class and poor Americans feel about the stagnation of their wages and the consequent fall in their living standards. He used the language of ‘them and us’ – it is us against the ‘global elite’.

The diagram above shows how the after-tax income of the richest one percent of the US population has increased dramatically since 1979, while the income of the poorest twenty percent (or poorest forty percent) has hardly changed.

Who is this ‘ global elite’? According to Chang, it is composed of super-wealthy business executives, who for years have paid themselves bigger and bigger salaries and better and better compensation packages at the expense of their own employees (and indeed of their own citizens and own societies).

“ The power of this managerial class has been most vividly demonstrated by the aftermath of the 2008 financial crisis. When the American and the British governments injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers responsible for their institution’s failure were punished. Yes, a small number of CEO’s have lost their jobs, but few of those that have remained in their jobs have taken a serious pay cut…” (P155).

I.B. ECONOMICS.

The second educational podcast in a series of three that looks at the Section 4 topic of Development, in particular at the question of ‘the balance between markets and government intervention’ (Section 4.8).

I.B. Economics.

Anyone studying economics, no matter how briefly, will soon come across the phrase, the ‘ free market’. We also talk about ‘ free marketeers’, who are economists who believe that the less the government ‘ interferes’ in markets the better. They tend to argue that when the government steps into markets and introduces, for example, a minimum wage or a price ceiling, then this results in a restriction on the ‘freedom of choice’ of the players in the market, and also causes a loss of efficiency in the market. One of the main themes of the IB Economics course is the debate about the extent to which governments should intervene in markets and should attempt to control them, and the extent to which should they should leave them alone and let them just get on to ‘do their job’.

For Ha-Joon Chang in his excellent book ‘ 23 Things They Don’t Tell You About Capitalism’ the argument put forward by the free marketeers is superfluous. Governments and politicians have always interfered in markets and have always attempted to control them. In his Chapter entitled ” There Is No Such Thing as A Free Market”, he says that markets have always been subject to rules, regulations and laws, some of which are ‘explicit’ but many others are ‘implicit’ and are not therefore obvious to us. For this reason, there is no such thing as a ‘free’ market.

Chang points out that in 1819 when in Britain Parliament introduced laws to protect children from being exploited in coal mines, the ‘ free marketeers’ of the day protested that this was an unwarranted interference in the market for labour (P2). Now we take it for granted that children should not be forced to work in coal mines. Similar protests occurred in the 1960’s and 70’s when legislation was enacted to stop factories from polluting the environment, or from producing products that damaged the environment. Again, the free marketeers of the era protested, saying that the legislation restricted the free choice of the economic agents involved in those industries. Now we take it for granted that firms should not pollute the environment or produce environmentally unfriendly products (P3).

Chang also points out how there are many rules and regulations emanating from governments determining what can or cannot be sold. For example, in most countries it is illegal to sell votes, university places and government jobs (P4).

Participants processing, Rio Carnival, 2014.

How else do governments ‘ control’ or ‘interfere in’ free markets?

One role of government in an economy is to create and enforce laws and two areas of law which are vital for the efficient functioning of free markets are laws of contract and laws about property rights. Take laws of contract. Whenever an economic transaction takes place a ‘contract’ is entered into. A buyer of a house, for example, signs a contract with the seller, usually a physical document, which specifies things like the agreed price that will be paid, how the payments will take place and who the true owner of the property is. If the buyer finds out at a later date that the seller was not the true owner of the property, then that contract becomes null and void, and the buyer can sue the owner for breach of contract.

What a lot of people don’t realize is that even when buying cheaper, more mundane things, like food in a restaurant, or a cup of coffee in a cafe, you are still entering into a contract with the seller. However, the contract is implicit in the transaction, and is something that most people just take for granted. Take buying a coffee in a cafe. When you buy it you are assuming that it is in fact coffee and not another type of product, and you are making the assumption that it is safe to drink. If you bought something that made you violently ill, and turned out not in fact to be coffee, you could sue the sellers of the coffee for breach of contract. Unlike the example above of buying a high value item like a house, you did not sign a contract with the coffee vendors ( i.e. a physical piece of paper), but you did enter into an implicit contract with the seller when you paid for the product. And if this contract is broken then you have the right to redress in the eyes of the law.

So, is there such a thing as a completely ‘free’ market in the sense of being free from government intervention or government interference? No. Laws and regulations govern how efficiently a market operates, and laws and regulations are created by, and enforced by, the state. These laws and regulations can be explicit, but some are implicit and are just taken for granted. To quote Chang:-

” How free a market is cannot be objectively defined. It is a political definition. The usual claim by free market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved, and those free marketeers are as politically motivated as anyone” (P1).

IB Economics.

The Similarities and Differences Between South Africa and Brazil.

I am spending the holiday in South Africa at the moment so thought that I would do a post on South Africa and Brazil.

When I started studying economics all those years ago we used the terms ‘ the First World’, the ‘ Second World’ and the ‘ Third World’ – meaning the rich countries, the Soviet Bloc countries and the poor countries of the world. However, the phrase ‘ Third World’ implies that all the poor countries are lumped into one block and are the same. Not true.

One of the most difficult things about development economics ( and for the politicians and government bureaucrats that try and ‘manage’ the development of a country) is that every county is different – they have different histories, different resource endowments, different cultures, different political systems, different climates, different languages and different social institutions.

Each country therefore faces it’s own unique problems that require their own unique solutions.

Here are the similarities between Brazil and South Africa ( SA) :-

Both are middle income countries – $ 6617 GDP per capita for SA in 2013, and $ 11208 for Brazil.

They are regarded as the industrial power hubs of their two continents

Both have been classified as BRICS

Both rely on the extraction and export of raw materials

Both have been suffering from falling economic growth recently because of the slowdown in the growth of China and the fall in raw material prices

Both countries currencies have depreciated a lot recently

Colonization – Brazil by the Portuguese, South Africa by the Dutch and the British, are common to both countries.

Both are located in the Southern Hemisphere

Both countries became truly democratic relatively recently ( see below)

A strong African culture exists in both countries – in the case of Brazil due to slavery

Extreme inequality of income and wealth, as shown by the shanty towns of SA and the favela’s of Brazil, are features of both countries.

South Africa’s experience of colonialism was longer and much more traumatic for the country, due to the racist system of ‘ Apartheid ‘ – the forcible separation of races and cultures in the country. Apartheid only ended in 1994.

South Africa’s peoples and cultures are more diverse than Brazil’s – SA has eleven official languages!

Brazil’s population is much bigger than SA’s – 250 million verses 53 million

Brazil is a much bigger country than SA

SA, arguably, has a better infrastructure than Brazil.

This thirteen minute video is about the life of Nelson Mandela, one of the greatest leaders of the 20th Century, and the man largely responsible for ending Apartheid in South Africa.

IB Economics.

If you want top grades in your coursework, you need to be able to prove skills of analysis, synthesis and evaluation. Commentaries that just describe or restate the information in the article, tend to get low marks. These skills are difficult to do and take time and practice to acquire.

What is analysis? When you analyze something, you look at it in a lot of detail, you break it down into it’s component parts and try and make links or connections between the different parts.

What is synthesis? A summary of the available information that you have – describing or explaining a complex thing in a shorter, more easily understood way.

Evaluation involves looking at something in a critical way and coming up with your own opinion on it, backed up by sufficient evidence.

All of the above skills are difficult to do, but evaluation is probably the hardest. What could you evaluate in your commentary?

An economic situation, policy or strategy.

Economic data

Economic theories

How can you do this when writing your commentary?

Critically assess the article. Is it biased? Does the writer leave out important information that you think should be included? Are the writer’s conclusions appropriate?

What are the advantages / disadvantages of the policies outlined in the article? What are the most important advantages and the most important disadvantages?

What are the short and long-term consequences of the economic strategies outlined in the article? Which groups (stakeholders) in the economy benefit and why? Which lose out and why?

What are the causes of the economic situation / consequences of the economic policies outlined in the article? Which are the most important causes and consequences and why? What are the remedies?

If there is data in the article, is it appropriate, reliable, relevant and accurate?

When using an economic theory, demonstrate a critical awareness of the theory. Explain the assumptions behind the theory. Are the assumptions realistic? Is the theory relevant and appropriate to the economic situation outlined in the article?

You should analyze, synthesize and evaluate throughout your commentary, but the evaluation should probably occur more towards the end of your commentary, just before your concluding paragraph (see the commentary structure diagram in Step Three – Writing Up Your Commentary ). In your concluding paragraph, you express your opinion, which finalizes your evaluation in the commentary.

IB Economics.

Diagrams are essential to economics. When you draw a diagram to explain or illustrate an economics situation, you are demonstrating your ‘ application’ skills – applying the theory we learn in class to explain or illustrate an economic situation. If you want top marks for your coursework, your diagram have to be excellent.

The following are a list of rules to follow:-

1) Diagrams should be large – around one-third of a page in size.

2) Always label the axes appropriately – eg “Price of Cars” , not just “Price” and “Quantity of Oil (Barrels per Year) ” not just “Quantity”.

3) Indicate the equilibrium points with dotted lines to the axes, with notation on the axes such as Q1 to Q2 or AD1 to AD2

4) You must use ARROWS to show the direction of any change i.e. a shift in a curve, an increase or decrease in price.

5) Do not confuse Macro and Microeconomics in your labeling! Eg it is ” Price” in Microeconomics and “Price Level” in Macroeconomics.

6) Most of your diagrams should be dynamic not static (i.e. they are illustrating some process of economic change). In other words curves must shift, prices change etc.

7) Do not BEGIN or END your commentary with a diagram. They must be located in the main body of the commentary.

8) Always explain and describe your diagrams, with explanations / descriptions coming AFTER the diagram. You must refer to specific lines and points AND you must use the diagram labels!

9) Label your diagrams “Diagram 1”, “Diagram 2” or “Figure 1”, “Figure 2” etc so that you can easily refer to them in your analysis.

IB Economics.

The maximum word count for each commentary is 750 words. It is vitally important to write as close as possible up to this limit i.e. 749 words! In order to maximize your marks, you will have to do a lot of things – write an introduction and conclusion, draw one or two diagrams, explain and describe each one, define some economic terms and concepts that you are using, directly refer to the article etc. All of this takes up a lot of your word count! For this reason make sure you use as much of your word count as possible.

I give my students the following diagram to help them:-

Commentary Structure Diagram.

In this case the commentary is two pages long and is made up of 8 paragraphs of writing. It includes 2 diagrams and each diagram is explained and described underneath. There is an introductory and concluding paragraph. (You don’t need to give them these subtitles, bye-the-way. Indeed, your commentary should not include any subtitles. It should just be composed of series of paragraphs, like a mini-essay).

IB Economics.

Your article sources must be news media sources, containing the latest news about an economics issue. Remember: you cannot use the same source for more than one commentary. Each source should be different for each commentary.

Notice something. The Economist magazine and the Financial Times are not on the above list. It is not recommended that you choose articles from these publications because they already analyse and evaluate the economic situation that they are talking about within the article itself. You are expected to do this within your commentary.

Also be warned. Some of the above news sources allow you to view an article once, but the next time you login you are asked to subscribe to the publication, and you cannot see the article again. If you see a good article, therefore, copy and paste it into another document straight away!